Blue Chip

Ablue chip is a nationally recognized, well-established, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue-chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.

The term "blue chip" was first used to describe high-priced stocks in 1923 when Oliver Gingold, an employee at Dow Jones, observed certain stocks trading at $200 or more per share. Poker players bet in blue, white, and red chips with the blue chips having more value than both red and white chips. Today, blue-chip stocks don’t necessarily refer to stocks with a high price tag, but more accurately to stocks of high-quality companies that have withstood the test of time.

A blue-chip stock is generally a component of the most reputable market indexes or averages, such as the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500 and the Nasdaq-100 in the United States, the TSX-60 in Canada, or the FTSE Index in the United Kingdom. How big a company needs to be to qualify for blue-chip status is open to debate. A generally accepted benchmark is a market capitalization of $5 billion, although market or sector leaders can be companies of all sizes.

A blue-chip company is a multinational firm that has been in operation for a number of years. Think companies like Coca-Cola, Disney, PepsiCo, Walmart, General Electric, IBM, and McDonald’s, which are dominant leaders in their respective industries. Blue-chip companies have built a reputable brand over the years and the fact that they have survived multiple downturns in the economy makes them stable companies to have in a portfolio. Many Conservative investors with a low risk profile or nearing retirement may usually go for blue-chip stocks. These stocks are great for capital preservation and their consistent dividend payments not only provide income, but also protect the portfolio against inflation. In his book The Intelligent Investor, Benjamin Graham points out that conservative investors should look for companies that have consistently paid dividends for 20 years or more.3

The Dividend Aristocrat List published by Standard and Poor’s comprises of large-cap blue-chip companies from the S&P 500 that have increased dividends every year for the last 25 years.

Blue-chip stocks are seen as less volatile investments than owning shares in companies without blue-chip status because blue chips have an institutional status in the economy. The stocks are highly liquid since they are frequently traded in the market by individual and institutional investors alike. Therefore, investors who need cash on a whim can confidently create a sell order for their stock knowing that there will always be a buyer on the other end of the transaction.

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